5 ways SECURE 2.0 Act may impact wealth management clients

When President Joe Biden signed his $1.7 trillion tax bill into law in late December 2022, it included the bipartisan Securing a Strong Retirement Act 2022, otherwise known as “SECURE 2.0 Act.” Designed to encourage investment, SECURE 2.0 Act, is full of provisions that are likely to impact the investors you serve as a financial advisor. 

Here are five takeaways from SECURE 2.0 Act that could be most important to your clients today and in the future, along with ways you can help clients take action or start the conversation now. 
 

1. Investors will be able to save more (and longer) for retirement
2. Roth tax treatment is more entrenched than ever
3. Significant expansion of startup credits could make this the time to set up a small-business plan
4. High net worth clients will have more tools for tax-efficient giving
5. Your clients may be just as interested in what’s not in SECURE 2.0 Act

1. Investors will be able to save more (and longer) for retirement

Perhaps the most exciting part of the new legislation is it encourages serious long-term saving with more opportunity and time to invest.

Increases to the required minimum distribution (RMD) age. The age at which investors must start taking withdrawals from individual retirement accounts (IRAs) is on the rise. The original SECURE Act pushed the RMD age from 70.5 to 72, but SECURE 2.0 Act has raised the age to 73 beginning in 2023. The age will increase again to 75 by 2033.

Importantly, because the new RMD age of 73 is effective for anyone turning 72 this year, no one will hit their RMD age in 2023. 

Catch-up contribution limitations bumped up. Catch-up contributions are available to individuals 50 or older and provide a way to maximize savings as you near retirement age. The new legislation adds incentives to save even more. For example, while catch-up contributions for IRAs are currently maxed out at $1,000, they will be adjusted for inflation in increments of $100 beginning in 2024.  

In 2025, the catch-up contribution maximums rise for investors between the ages of 60 and 62 in an employer plan. The limits will be increased to 50% more than the regular catch-up limit or $10,000, whichever is greater. 

How you can help now: For your clients in their late 60s or very early 70s who do not need their retirement savings to live on, it’s a good time to reach out and let them know that they’ll get an extra year without required distributions and can plan accordingly.

2. Roth tax treatment is more entrenched than ever

Roth IRAs, 401(k)s and 403(b)s continue to grow in popularity among investors looking to minimize the impact of income taxes on future gains. The new legislation makes these vehicles even more appealing to investors, with a few key changes.

More ways for employees to save for retirement using a Roth. Effective immediately, vested employer contributions are now eligible for Roth treatment. Employers may now offer employees the option have employer contributions (both matching and nonelective) made to employees’ Roth accounts in 401(k) and 403(b) plans. 

No more lifetime RMDs required from employer plan Roth accounts. Effective in 2024, investors with Roth 401(k)s or 403(b)s will no longer be required to take lifetime RMDs from those accounts. Distributions for employer Roth accounts will be more in line with traditional Roth IRAs, which do not require withdrawals until after the death of the account owner. As a result, the default move of rolling over a Roth 401(k) to a Roth IRA to avoid RMDs may no longer make sense for many clients. 

Roth treatment required for some catch-up contributions. With increased catch-up contribution limits come some additional restrictions for high-earning individuals. Starting in 2024, all catch-up contributions to retirement plans will be made on an after-tax basis for individuals who earn $145,000 or more, even if regular contributions are made on a pre-tax basis. 

SIMPLE and SEP Roth IRA options added. Small-business owners now have the option to offer Roth versions of Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRAs, in addition to traditional versions of those plans.

How you can help now: For retirement savers that receive a portion of their compensation through employer contributions, help them start the discovery process to find out if their employer will be offering this Roth option, how the election will be made, and whether it makes sense for them.  Note that it will likely take some time for employers and plan administrators to update their infrastructure and procedures to accommodate this change, so employees may not be able to elect this new Roth option for several months. 

For your clients with Roth 401(k)s that are already taking RMDs or would be required to start taking RMDs next year, this obligation appears to completely halt as of 2024. Accordingly, if the client does not need to access retirement assets to pay for living expenses, you can discuss with them (and their tax professional) whether it makes sense to continue taking these distributions or leave the money in the plan to capture that tax-deferred growth.

3. Significant expansion of startup credits could make this the time to set up a small-business plan

A retirement plan startup cost tax credit allows eligible employers to claim a tax credit of up to $5,000 for three years for the costs of setting up a SEP or SIMPLE IRA or qualified plan. SECURE 2.0 Act strengthened the existing startup plan tax credit by removing its percentage limitations for plans with no more than 50 employees and creating a new credit that reimburses small business for up to $1,000 of employer contributions paid on behalf of modest earners. This new tax credit starts at 100% of employer contributions for certain employees, and phases down over the first five years of plan adoption. 

How you can help now: With state-mandated retirement legislation adopted in at least 14 states and under consideration in several more, many small-business owners are exploring plan adoption. For your small-business owner clients that have not yet adopted a plan, particularly for those operating in states that are anticipating mandates, now may be a good time to reach out to let them know about the new benefits and options around plan adoption and funding under SECURE 2.0 Act. Most of these changes are effective immediately, so employers can take advantage of them right away.

4. High net worth clients will have more tools for tax-efficient giving

529-to-Roth rollover option. Starting in 2024, 529 education plan assets can be rolled over directly into a Roth IRA for the beneficiary of the 529 plan, within certain limitations. This means clients that are concerned about overfunding 529s can err on the side of contributing more, knowing they’ll be able to access at least a portion of those leftover assets without taxes or penalties. The rollover option may also make 529 accounts more appealing to clients who aren’t sure whether their beneficiaries will use the funds for higher education.

Limitations to this part of this provision include:
 

• The 529 account must be at least 15 years old with the same named beneficiary during that period.
• The amount to be rolled over must have been in the account for at least five years.
• The Roth account must be in the name of the 529 plan beneficiary.
• Rollover contributions must be within Roth IRA annual contribution limits ($6,500 in 2023), and is reduced by any “regular” traditional or Roth IRA contributions made by the beneficiary in that year.
• Rollovers are limited to a maximum of $35,000 per beneficiary over their lifetime.

The income limitations for regular Roth IRA contributions do not apply to 529-to-Roth rollovers. However, it appears that the beneficiary will be required to have earned income of some kind to qualify for a rollover. 

Expansion of qualified charitable distributions (QCDs). QCDs provide one of the most tax-efficient ways for high net worth clients to accomplish their charitable giving goals by allowing them to directly transfer funds from a retirement account to a charitable organization. QCDs count against RMDs and allow retirement funds to be used directly for charitable contributions on a pre-tax basis, which allows individuals to make charitable contributions that are not subject to the limitations of an itemized income tax deduction. 

Currently, individuals can make up to $100,000 of QCDs annually, beginning at age 70 ½.  Under SECURE 2.0 Act, starting in 2024, the QCD limit will be indexed for inflation, which means it is likely to be substantially more than the current limit.

Additionally, starting this year, taxpayers can use QCDs to fund charitable remainder trusts (CRTs) or charitable gift annuities. As with the new 529 plan rollover provision, the limitations to this new rule makes it less compelling than it may initially seem. For example, the maximum amount that can be used to fund these split-interest entities is $50,000 per taxpayer, and it is a one-time transfer. Further, the split-interest entity can only be funded with QCDs, no other funds. It’s hard to find a circumstance where it would be worth the cost and work to set up a CRT with these types of funding limitations. From a practical perspective, using QCDs to fund a charitable gift annuity, where the entity is established and operated by the charitable organization itself, may be the only realistic opportunity granted by this new provision. 

How you can help now: For your clients that may have extra amounts in children’s and grandchildren’s 529 accounts, you can use the new 529-to-Roth rollover provision to start the conversation around what to do with those funds and if this new rollover option will be available to their beneficiaries. For families that plan on taking advantage of this new provision, you can help set up the Roth accounts for the 529 beneficiaries that will receive the rollover and plan to adjust their outside IRA contributions accordingly.   

For clients that recently had a child or grandchild, this new rollover option is just another reason to set up a 529 for new arrivals. Depending on how certain parts of the legislation are interpreted, there may be an opportunity to help younger generations establish a solid retirement nest egg and save for higher education at the same time. 

For clients who have significant retirement assets and are charitably inclined, the expansion of the QCD rules will give them more options when it comes to using their retirement assets to accomplish their charitable goals. Advising these clients of the expanded QCD rules can be a great way to jump-start a review of the client’s charitable giving plan or estate plan in general.

5. Your clients may be just as interested in what’s not in SECURE 2.0 Act

In light of all of the proposed changes to retirement legislation being covered in the news over the past several years, it helps to be aware of what’s not included in SECURE 2.0 Act. For example, here’s a quick list of what the act does not change:

• Conversions to a Roth IRA from a traditional IRA or employer-sponsored plan
• Backdoor Roth IRA conversions
• The age at which QCDs are permitted (it remains at 70 ½ or older)
• The types of investments that can be purchased with retirement funds
• The “10-year rule” for inherited IRAs implemented under the SECURE Act

How you can help now: For clients that have been asking questions about SECURE 2.0 Act, it’s helpful to communicate the limits of the legislation, especially around headline-grabbing issues such as Roth conversions. It’s also a good time to remind clients about the 10-year distribution period for IRAs inherited after 2020.

To be sure, there plenty of other provisions in SECURE 2.0 Act, some of which don’t take effect right away (For a printable PDF of what’s going into effect and when, see SECURE 2.0 Act of 2022: A boost to retirement saving). For example, the age by which a disability occurs to be eligible for Achieving a Better Life Experience (ABLE) accounts will increase from 26 to 46 in 2026, making those accounts more accessible to investors in need. In the meantime, these five takeaways should help spur productive conversations with clients.